Equity Shares | Structure, Rights and Corporate Actions

Equity is the most fundamental financial instrument | and also the most misunderstood in its mechanics. Most retail investors know they own "a piece of the company." Fewer understand what rights that ownership actually confers, or how those rights change when a company does a bonus issue, a rights issue, a buyback, or an ESOP grant.

Understanding corporate actions isn't just academic. It directly affects your portfolio | sometimes your returns look better than they are because of splits, sometimes worse because of dilution. RupeeCase adjusts all historical prices for corporate actions, but you should understand exactly what's happening under the hood.

Ordinary shares vs preference shares

Two main types of shares exist in Indian capital markets. When people say "shares" or "equity," they almost always mean ordinary shares (also called common shares or equity shares).

For systematic equity investing | which is what RupeeCase is built around | you will only ever be dealing with ordinary shares. The preference share structure matters more for understanding the liability side of a company's balance sheet.

What equity ownership actually means

When you own 100 shares of Reliance Industries out of its ~6.77 billion shares outstanding, you own approximately 0.0000015% of Reliance. That fraction entitles you to:

• Proportional claim on dividends | if Reliance declares ₹9/share dividend, you receive ₹900
• Voting rights at AGMs | one vote per share on board appointments, major transactions, capital raises
• Residual claim in liquidation | after all debt, preference shares, and liabilities are paid, ordinary shareholders split whatever remains
• Right of first refusal (pre-emption rights) | if the company issues new shares, you have the right to buy new shares proportionally to maintain your ownership percentage (subject to conditions)

The five major corporate actions

Companies regularly take actions that change the number of shares outstanding or their price. Every single one of these affects your portfolio calculations. Here's what each one does:

1. Bonus shares

A bonus issue (also called a stock dividend or capitalisation issue) gives existing shareholders additional free shares in a fixed ratio. A 1:1 bonus means you receive one additional share for every share you hold | your shareholding doubles, but the share price halves to adjust. Your total value doesn't change on the day of the bonus.

Why do companies do this? A growing company that has accumulated large reserves can use a bonus issue to convert those reserves into paid-up capital. It also makes the share price more "accessible" | a ₹2,000 stock might become a ₹1,000 stock after a 1:1 bonus, potentially improving liquidity and retail participation.

2. Stock splits

A stock split increases the number of shares by reducing the face value. A 10:1 split means each share becomes 10 shares | if Infosys had a face value of ₹10 and splits 10:1, the face value becomes ₹1 and the number of shares multiplies by 10. Share price adjusts proportionally. Economically identical to a bonus issue in outcome.

Infosys did a 2:1 split in 1999, 2004, and 2018. Each split made the stock more accessible to retail investors and is part of the reason Infosys has remained one of India's most widely held stocks.

3. Rights issue

A rights issue gives existing shareholders the right (but not obligation) to buy new shares at a discount to the current market price, in proportion to their existing holding. A 1:5 rights issue at ₹500 (when market price is ₹700) means: for every 5 shares you hold, you can buy 1 additional share at ₹500.

• You can subscribe | pay ₹500 and receive the new share, maintaining your ownership percentage
• You can renounce | sell your rights entitlement in the market (rights are tradeable on NSE for the subscription period)
• You can let them lapse | your ownership percentage is diluted as new shares are issued to others

4. Buybacks

A buyback (share repurchase) is the company buying its own shares from the market, reducing the total shares outstanding. From a shareholder's perspective: each remaining share now represents a larger slice of the company. If Reliance has 6.77 billion shares and buys back 100 million, each remaining share's ownership fraction increases.

India has two buyback routes: open market (company buys shares on exchange over time) and tender offer (company invites shareholders to sell at a premium price in a set window). Buybacks are often more tax-efficient than dividends for shareholders | LTCG tax vs dividend tax treatment.

5. ESOP (Employee Stock Option Plans)

ESOPs grant employees the right to buy company shares at a predetermined exercise price, usually below market price. When employees exercise options, new shares are issued | diluting existing shareholders. This is the corporate action that most retail investors underappreciate.

A company with ₹100 Cr profit and 1 crore shares has EPS of ₹100. If it grants ESOPs equivalent to 10 lakh shares and employees exercise them, shares outstanding become 1.1 crore | EPS drops to ~₹90.9 on the same profit. That's dilution. Always check the diluted EPS, not just basic EPS, when valuing companies with large ESOP programmes (especially IT and startup-adjacent companies).

How corporate actions affect backtests and factor signals

A stock that was at ₹2,000 before a 1:1 bonus appears to have dropped 50% the next day. That's not a loss | it's a mechanical price adjustment. Any backtest or factor model that doesn't adjust for corporate actions will produce garbage results.

Glossary